The preparation of the consolidated financial statements according to IFRSs requires that assumptions, judgements and estimates be made which have an effect on the carrying amount of assets and liabilities as well as expenses and income.
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Accounting for business combinationsGoodwill is disclosed in the course of business combinations. Upon first-time consolidation, all the identifiable assets, liabilities and contingent liabilities are carried at fair value. The carrying amounts are subject to significant uncertainty. If intangible assets are identified, the fair value of the intangible asset is determined based on the nature of the asset using appropriate valuation techniques. These measurements are closely associated with assumptions of management about the future development of the value of the asset and the discount rates used. Please refer to the disclosures on business combinations starting on page 140.
Valuation for assets held for sale
The valuation of discontinued operations as well as entities classified for assets held for sale is based on present value less costs for sale. The measurement of present value is orientated on offers to buy or preliminary offers to buy as well as generally applied company valuation models (discounted cash flow model).
Impairment of goodwill and commercial brands
The annual impairment test of goodwill and brands with an indefinite useful life (31 March 2015: EUR 2,220.5 m; previous year EUR 2102.8m) is based largely on assumptions pertaining to the future. The management planning for the next five years is derived from past developments and the expectations with respect to future market developments and does not include any restructuring activities that the group is not yet committed to or any capital expenditure related to its ordinary business that will enhance the earnings of the cash-generating unit being tested. Significant planning assumptions relate to revenue growth, the development of gross margins and operating margins, the discount rate and the growth rate in the period after the detailed planning period as well as direct synergies in procurement resulting from the business combination with McKesson, which can be allocated to the individual cash-generating units. In addition, the expected impact of government measures in the health sector is of special significance. The assessment of the cash flows from new business activities, on which the recoverable amount is based, is particularly reliant on management estimates of the future development of these market segments. In these cases historical information is available to a limited extent only. Moreover, unforeseen government measures could have a negative impact on future revenue and cash flows of Wholesale and Pharmacies. If demand for these products and services does not develop as expected, or if unexpected government measures are introduced, this
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General disclosures Celesio AG 2015could reduce income and cash flows and possibly lead to a need to record an impairment loss. These premises and the underlying calculation model can have a material impact on the respective values and ultimately on the amount of a possible goodwill impairment. Please also refer to the notes on impairment testing for goodwill and brands starting on page 115.
Trade receivables and other assets
The allowance for bad debts totalling EUR 106.1m (previous year EUR 145.3m) is based to a large extent on estimates and judgements of individual receivables, taking into account the creditworthiness of the respective customer, the current economic situation and the analysis of historical bad debts on a portfolio basis. To the extent that impairments are derived from historical bad debt rates on a portfolio basis, a drop in the total volume of receivables reduces such provisions and vice versa. For more information please refer to note (17).
Pension benefits
The expenses from defined benefit plans after termination of the employment contract and the defined benefit obligation for the pension obligation amounting to EUR 1008.5 (previous year EUR 946.6m) are determined using actuarial calculations. Actuarial calculations involve making assumptions about discount rates, future wage and salary increases, the mortality rate and future pension increases. All assumptions are reviewed at each reporting date. When determining the appropriate discount rate, management bases its decision on the interest rates of corporate bonds with top ratings in the country in question. In Norway, the recommendations of the national standards-setting committee on discount rates are also taken into account. Moreover, Celesio conducts sensitivity analyses for the corresponding parameters and their impact on the present benefit obligation. The mortality rate is based on publicly available mortality tables for the specific country. Future salary and pension increases are based on expected future inflation rates for the respective country. For more information please refer to note (20).
Provisions
When measuring provisions, particularly those relating to property, litigation and tax risks, potential losses and restructuring measures, assumptions and estimates play an important role in assessing the probability of utilisation, the obligation amount and the interest rates used for non-current provisions. The measurement
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is made on the basis of past experience and future price increases. Celesio recognises provisions for current litigation if it is more likely than not that an obligation will arise that will lead to an outflow of resources embodying economic benefits and these can be reliably measured. Celesio assesses the status of current litigation at regular intervals, also with the involvement of external lawyers. The assessment may change as new information becomes available, making it necessary to adjust the provision for litigation to reflect new developments. Upon conclusion of the litigation, expenses may arise for Celesio which exceed the amount provided for. For more information please refer to note (21).
Contingent liabilities
Contingent liabilities related to legal and tax risks that are recognised in the course of a business combination are subject to a high degree of planning uncertainty. Contingent liabilities were recognised primarily at Panpharma, Brazil, for legal and tax risks. The tax risks relate primarily to VAT liabilities towards Brazilian federal states. Due to uncertainty as to the exact outflow of cash, the risk was recognised upon initial consolidation as a contingent liability of EUR 113.9m. This assessment was based on an appraisal by an external expert. The carrying amount as of 31 March 2015 came to EUR 21.5m (previous year EUR 25.3m). This involved measuring a range of possible levels of utilisation and probabilities of occurrence. Celesio assesses these legal and tax risks at regular intervals, consulting external lawyers where necessary. The assessment may change as new information becomes available, making it necessary to recognise an additional provision pursuant to IAS 37, adjust the existing provision or release the contingent liability. Upon utilisation, expenses may arise for Celesio which exceed the provision amount.
In Brazil, there are disagreements between states regarding the mutual recognition of VAT concessions. As regards this, in December 2014 Panpharma received a tax assessment from a federal state tax authority in Rio de Janeiro with an amount of approx. EUR 80m for the years 2009 to 2013. Panpharma filed a defence against this claim. We disagree with the assessment of the State Tax Authorities and believe that we have strong legal arguments based on the usage of external lawyers to defend our positions. The chances for Panpharma of losing the legal dispute or rather overruling of the objection have been assessed to be possible, but not more likely than not. For more information please refer to note (26). Since the reporting
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General disclosures Celesio AG 2015period, the Panpaharma unit has been recognised as held for sale. For detailed information and explanations please refer to note (16).
In Slovenia, contingent liabilities for risks due to an antitrust case were recognised.
Deferred taxes
The measurement of deferred tax assets and liabilities requires management to make certain assumptions and estimates. In addition to the interpretation of the tax legislation applicable to the respective taxpayer, the calculation of deferred tax assets on temporary differences and unused tax losses involves assessing the extent to which future taxable income will become available and how tax strategies will be implemented to exploit loss carryforwards. For more information please refer to note (14).
Contingent consideration from business combinations
The measurement of contingent consideration from business combination requires management to make certain assumptions and estimates. The measurement is based on management planning, if available. The disclosure of the possible range of contingent consideration usually assumes a hypothetical increase or decrease in the relevant underlying earnings or other performance indicators. Please refer to the disclosures on business combinations starting on page 140.
All assumptions and estimates are based on circumstances prevailing at the end of the reporting period. Future events and changes in conditions can mean that the actual amounts differ materially from the estimated figures. In such cases, the assumptions and, if necessary, the carrying amounts of the assets and liabilities concerned are adjusted accordingly. At the time of preparing the consolidated financial statements, the underlying discretionary decisions and estimates were not expected to be subject to any major changes. Based on the information available today, no significant adjustment of the carrying amounts of the assets and liabilities disclosed in the consolidated financial statements is therefore expected in the fiscal year 2015.
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Consolidated group
The consolidated group comprises 339 (previous year 335) fully consolidated domestic and foreign companies. This includes six special purpose entities which are consolidated pursuant to IFRS 10 – Consolidated Financial Statements, even though Celesio AG does not hold the majority of the voting rights. The purpose of these companies is generally to lease properties. As of 31 March 2015, no entities were consolidated on the basis of potential voting rights (previous year none) relating to shares not held by Celesio, although there is no longer any actual voting majority.
Compared to the previous year, the consolidated group developed as follows:
Number
As of 01/01/2015 335
Acquisition of shares 4
As of 31/03/2015 339
Of which domestic entities 18
Of which foreign entities 321
In 2015, no group companies were liquidated (previous year 29). 61 (previous year 60) associates were consolidated using the equity method. There were no joint ventures (previous year none).
The complete list of major shareholdings – an integral component of the notes to the consolidated financial statements – is published in the German Federal Gazette and on the website celesio.com.
The table below lists the most significant subsidiaries in which Celesio AG holds a direct or indirect controlling interest.
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General disclosures Celesio AG 2015Name Domicile
AAH Pharmaceuticals Limited Coventry, UK
GEHE Pharma Handel GmbH Stuttgart, Germany
Herba Chemosan Apotheker-AG Vienna, Austria
Lloyds Pharmacy Limited Coventry, UK
Norsk Medisinaldepot AS Oslo, Norway
OCP Portugal, Produtos Farmaceuticos, S.A. Maia, Portugal
OCP Répartition S.A. Saint Ouen, France
Panpharma Distribuidora de Medicamentos Ltda. 1) Goiânia, Brazil
Pharma Belgium S.A. Brussels, Belgium
Tjellesen Max Jenne A / S Rodovre, Denmark